EMU under threat, says George

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The launch of a single European currency in 1999 is under threat because of the recent slowdown in Europe's economies, the Governor of the Bank of England Eddie George conceded yesterday.

Speaking after a meeting in Frankfurt of the European Monetary Institute, the forerunner of the planned European Central Bank, Mr George highlighted the poor record of member states on curbing public deficits - one of the key convergence targets of the Maastricht Treaty

This has been caused by higher than planned levels of public spending as governments in several European Union economies have been caught in the trap between lower tax revenues and burgeoning social security payments.

The EMI's annual report, published yesterday, accepts that in the large majority of the 15 EU member states, public deficits were well in excess of the levels needed to meet the criteria for a single currency.

This is certain to be seized on by critics of economic and monetary union, who argue that the drive towards a single currency will only produce more hardship, unemployment and rising deficits.

The institute said structural deficits remained high in most countries as did the share of the economy taken up by the public sector.

However, the EMI said economic difficulties across Europe, caused by high interest rates, German wage settlements and slowdown in US growth, were no justification for postponing the measures needed to achieve economic convergence.

Alexandre Lamfalussy, the institute's president, said: "The present economic slowdown in Europe does not provide a justification for postponing necessary consolidation measures."

He also argued that fiscal consolidation could be achieved without causing further economic slowdown, provided the focus was on cutting public expenditure rather than raising taxes.

The institute's comments were being seen as a clarion call to supporters of EMU to redouble their efforts to sell the concept across the Union in what is likely to be crucial year on the path to monetary union.

Under the Maastricht timetable, member states are due to decide whether to submit to a single currency by the beginning of 1998.

The conversion rates at which individual currencies enter would then be fixed in January, 1999, effectively marking the start of the single currency.

Banknotes and coins for the single currency, the Euro, would then be introduced in January, 2002, with national banknotes ceasing to be legal tender in July that year.

The EMI said the factors which contributed to the slowdown in the second half of 1995 were likely to be temporary. It also noted that levels of consumer demand, which had been expected to support an economic upswing, remained weak. However, it forecast a pick-up in growth in 1996, due to rising domestic demand.